PRESERVING THE INHERITANCE Inheritance tax (IHT) has some unique features and it is easy to collect because the authorities meet with least resistance. However, it is relatively easy for wealthy taxpayers to at least minimise the liability, if not avoid it altogether, and consequently IHT is sometimes referred to as a voluntary tax. Nonetheless, planning to minimise IHT is something that many put off until it is too late and early Sowhat’s the problem? IHT is still a problem because:
• gifts made in consideration of marriage up to £5,000 if made by a parent, £2,500 by grandparents and £1,000 by others • gifts to charities whether made during lifetime or on death • gifts between spouses and registered civil partners, whether made during lifetime or on death. Planning in lifetime If possible you should make absolute gifts in your lifetime. A gift to an individual will be a PET so there will be no liability if the donor survives seven years. Even if the donor fails to survive for all of that period there may be a tax saving because the charge which will arise on the PET will be based on the value of the asset when it was originally gifted and not on the value at the date of death. If the value of the gift is below the threshold there will be no charge on the PET but the gift will use up some of the nil rate band on death. This means that there may be more tax to pay on the assets still in the estate on death. Tax Planning Each spouse/civil partner can take advantage of the IHT nil rate band. Furthermore, gifts between themare exempt (but with special rules for non-UK domiciles). Therefore it pays to use this exemption to broadly equalise estates so that both partners canmake full use of exemptions and the nil rate band.
• many are simply not in a position to make substantial lifetime gifts because it will leave them with insufficient capital to live on. As a consequence there is likely to be significant value retained in estates on death. • despite the introduction of the residential property nil rate band, which gives some measure of relief, many individuals have a home which will use up the bulk of the nil rate band and any excess remaining assets, such as investments and cash reserves, may be charged to IHT at 40%. Mitigating the liability Do not waste your exemptions. Regularly using IHT exemptions will build up funds outside of the estate without incurring an IHT liability. Spouses/civil partners can each take advantage of the exemptions, the main ones being: • an annual allowance of £3,000 per donor per year. This can be carried forward for one year only if unused • small gifts not exceeding £250 in total per donee per tax year • gifts made out of surplus income that are typical and habitual
attention to this tax is almost always worthwhile. The threshold for IHT (also called the nil rate band) is currently frozen at £325,000 until 6 April 2026. Many estates fall within the charge to IHT and even if your assets are worth less than this you should consider making a Will so that you choose who gets your assets after your death. Key features: • IHT is charged on a person’s estate when they die and on certain gifts made during their lifetime • the rate of tax on death is 40% and 20% on lifetime chargeable transfers. The first £325,000 is not chargeable • many lifetime gifts are treated as ‘potentially exempt transfers’ (PETs). So long as the donor lives for at least seven years after making the PET there will be no possibility of an IHT charge whatever the size of the gift • there are numerous exemptions and reliefs.
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Preserving the Inheritance
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